Rep. Peter DeFazio introduces the "No Bailout Act" with other House members on September 30, 2008 on Capitol Hill. (Photo: TIM SLOAN/AFP/Getty Images)

by Frank James

You know the failed but still alive $700 billion bailout proposal has scrambled politics in the nation's capital when a fairly liberal member of Congress offers a solution to the financial-markets crisis that looks like something a Reagan Administration official created.

DeFazio, a vociferous opponent of the Bush Administration's $700 billion Wall Street bailout, calls his legislation the "No BAILOUTS Act" and he talked about it today at a Capitol Hill press conference. He was joined by several other House Democrats:

And the underlying concern we all share is, we question the Paulson premise.

That is that giving him 700, borrowing or printing $700 billion, giving it to him and having him buy bad assets, on Wall Street,somehow will solve the interbank loan problem and even less likely the underlying problems of the economy.

And the interesting thing is 400 economists last week questioned that premise. That was brushed off. But if you read today's New York Times, at the point in which the world market thought we were going to adopt the Paulson plan and roll over, it says here, "Other analysts noted that credit markets around the world were almost entirely dysfunctional on Monday morning when political leaders and investors alike assumed Congress had reached a firm deal and would easily approve the bailout." It goes on from there with some detail.

The point is the premise is faulty. And as much as the Democratic leadership has tried to improve it, it still is likely to fail. So we have an alternative. And we would like to talk a little bit about that today and then we're going to have further discussion from other members.

If there's a no-cost or low-cost alternative available for the taxpayers, we should take it. And we have a working paper -- it's not done yet. I'm going to be talking to Darrell Issa on the Republican side and John Shadegg later today. This is a common set of points we have so far, but it's a work in progress. We've tentatively called it the "No BAILOUTS Act" which would be bringing accounting, increased liquidity, oversight and upholding taxpayer security. You have to start with a spiffy name around here. We'll work out the details later. (Laughter.)

But the point is, folks would like to come together on something that doesn't put the taxpayers at risk. That's a common theme among members both who voted for the bill and who voted against the bill. Don't put the taxpayers at risk. The protections in that bill yesterday were nonexistent, in terms of the taxpayers.

So we're saying here, let's try a different approach....

The part of the legislation pretty much anyone would understand immediately is an increase in the size of bank deposits that are federally insured, from $250,000 from $100,000.

The bill would also mandate a new program meant to buttress eligible banks by allowing them to receive "net worth certificates" from the FDIC. Those certificates wuld count towards the banks' capital requirements, a form of borrowing that would increase their liquidity, the money they'd have on hand. The idea was used during the 1980s to recapitalize lending institutions to great effect.

There'd be other technical changes. The bill would change how banks and other financial companies account for their mortgage-backed securities, permitting them to value them not at what they could fetch in the market, which right now is nothing, but at a higher amount based on the "economic value" they could later receive.

It would also make changes to the practice of selling stocks short, that is borrowing a stock whose price you think is going to drop, selling it, then buying it back at the lower price to give back to the owner, while pocketing the profits.

The practice of selling the stock without first borrowing it is already illegal. But somehow DeFazio's legislation would make it more illegal. Not sure how that's going to work.

And it would end the uptick rule which require short sellers to sell stock on the "uptick" which, oversimplified, means the short seller would have to sell when the stock price ticked up, a rule meant to protect stocks from being driven into the ground by short sellers.

The beauty of it from DeFazio's perspective is that his bill wouldn't require taxpayer money to implement.

1) Require the Securities and Exchange Commission (SEC) to require an economic value standard to measure the capital of financial institutions.

This bill will require SEC to implement a rule to suspend the application of fair value accounting standards to financial institutions, which marks assets to the market value, no matter the conditions of the market. When no meaningful market exists, as is the current market for mortgage backed securities, this standard requires institutions to value assets at fire-sale prices. This creates a capital shortfall on paper. Using the economic value standard as bank examines have traditionally done will immediately correct the capital shortfalls experienced by many institutions.

2) Require the Securities and Exchange Commission to restricting naked short sells permanently

This bill will require SEC to implement a rule that blocks naked selling, selling a stock short without first borrowing the shares or ensuring the shares can be borrowed. Such practices many times harm the companies represented in the sales and hurt their efforts to raise capital. There is no economic value produced by naked short sales, but significant negative effects.

3) Require the Securities and Exchange Commission to restore the up-tick rule permanently.

This bill will require SEC to implement a rule that blocks short sales without an up-tick in the market. On September 19, 2008, the SEC approved a temporary pause of short selling in financial companies "to protect the integrity and quality of the securities market and strengthen investor confidence." This rule prevents market crashes brought on by irrational short term market behavior.

3) Require the Securities and Exchange Commission to restore the up-tick rule permanently.

This bill will require SEC to implement a rule that blocks short sales without an up-tick in the market. On September 19, 2008, the SEC approved a temporary pause of short selling in financial companies "to protect the integrity and quality of the securities market and strengthen investor confidence." This rule prevents market crashes brought on by irrational short term market behavior.

4) "Net Worth Certificate Program"

This bill will require FDIC to implement a net worth certificate program. The FDIC would determine banks with short-term capital needs and the ability to financially recover in the foreseeable future. For those entities that qualify, the FDIC should purchase net worth certificates in these institutions. In exchange, these institutions issue promissory notes to repay the FDIC, counting the amount "borrowed" as capital on their balance sheets. This exchange provides short term capital, with not cash outlay. Interest rates on the certificates and the FDIC notes should be identical so no subsidy is necessary.

Participating banks must be subject to strict oversight by the FDIC including oversight of top executive compensation and if necessary the removal of poor management. Financial records and business plans should be subject to scrutiny while participating in the program.

In 1982, Congress approved a program, known as the Net Worth Certificate Program, that allowed banks and thrifts to apply for immediate capital assistance. From 1982 to 1993, banks with total assets of $40 billion participated in the program. The majority of these banks, 75%, required no further assistance beyond the certificate program.

5) Increase the FDIC Insurance limit from $100,000 to $250,000.

The bill will require the FDIC raise its limit to provide depositors confidence that their money is safe and help eliminate runs on banks which are destabilizing to the industry.

Comments

Gosh darn! Who knew Reagan was a socialist?
I generally like this plan, and it should be Dem. plan. Screw the Repubs. When Head Pig Denny H. ruled the Animal Farm he never included the Dems in anything.
If nothing else this latest debacle proves you can't trust a Republic politician.
I can't wait to see the reaction of Sec. Daddy Warbucks and his minion, Prez Blofeld.

Personally, I don't have a problem with any of the items I read in this proposal. In fact, 'd like to see congress pass the "No BAILOUTS Act" and see what impact it actually has on the economy BEFORE they commit taxpayer dollars to buying up bad securities and investments. That's a fantastic idea!

“It gets me angry. I do talk radio and most talk radio is conservative-dominated ideologues; Kool-Aid drinking idiots. Idiots. Screaming at you that this is socialism, this is this, this is that. ‘It’s Clinton’s fault.’ It’s Clinton’s fault? He hasn’t been in office in 8 years. It’s Bush’s fault! It happened under Bush’s watch.”

Let’s say that I am of mixed feelings regarding this “bailout.” Wall Street wizards, overcompensated Chief Executive Officers created a problem that we, the taxpayers must resolve on our backs; passing the load unto our children.

We will be unable to solve our economic problems without job creation. A nation that does not manufacture goods is a “One Winged Bird”…..and I have yet to see one fly. Any bill coming out of Congress must contain a job creation feature. The Working Class must be put to work in high paying unionized jobs and the tax base of our nation must be expanded. Let’s not forget that it was the unions that created the American Middle Income group.

The Government should give away solar panels to all homeowners and tie them into the national grid. For the first three years, the homeowners will not see any remuneration until the cost of the panels and their installation have been paid back. The pay-back will be through free electricity received by the regional electric utilities. This would cut consumption of oil by thirty percent (30%) in five to ten years. This would also be coupled this with wind and hydroelectric power.

We could get hydroelectric plants built faster than nuclear reactors due to less legal maneuvering. We could demand that all vehicles built after 2015 be either hybrid or achieving no less than thirty miles per gallon in the city and forty on the highway. This would further reduce oil consumption by an additional twenty (20%) percent over the next seven years.

The “bailout” must also include protecting all homeowners facing foreclosure; ensuring that these homeowners do not lose their homes and stemming mass upheaval of working families. Any “bailout” that protects Wall Street must also protect working families who have been mandated to shoulder the cost burden.

Banks and other institutions that loan money to people that cannot afford to repay these loans must be held accountable for their actions. We cannot blame hard working families that tried to stretch their dollars for a better way of life. They were victims of the banking scam. It was intended to defraud them and they fell for it.

Funds should also be allocated to the re-building of housing stock in New Orleans and the Gulf Coast region to ensure the ability of the internally displaced citizens to be repatriated to their homes.

These are few of the necessary fixes that Congress must add to this “bail-out”.

Please look at the DeFazio-Kaptur "No Bailouts Act", and ask your friends to consider it as an alternative to the current bailout legislation now before congress.

This proposal is based on tried and successful previous credit crunch resolution in this country and in Europe, that will not reward the authors of our current financial mess. If you find it viable, encourage your representatives in Congress to support it.

The United States has programs and insurance programs to cover the greater part of the financial issues challenging the banks, and investment houses. It appears to me that the Treasury Secretary is attempting to avoid those as solutions, and give himself the major role in changing the existing system, which has served us well since the 1930's.

It would be better to let the poorly run banks and investment houses fail, while saving the depositors (FDIC, FSLIC, et cetera), and investors (SIPC). The is no purpose in saving failed businesses. It looks like enough banks, credit unions, savings and loans, and investment houses did the right thing when it came to giving credit that they can take on the excess business the failure of the others will release.

Using the existing programs will probably cost less, since they will be pinpointed on the true failed financial businesses, and avoid the likely excesses of a wide open program spending hundreds of billions of dollars, or more.

I do not support any bill bailing out failed banks and investment houses, since the primary purpose will be to save the jobs of the executives who caused the current economic confusion: however, if the Congress is to fashion a bill to give the Treasury Secretary wide power to buy financial instruments, I ask that at least these instruments, contracts, et cetera having no collateral be written out of the list of instruments the Secretary may purchase. The proposed bill would allow Treasury to purchase instruments, contracts having no collateral, which some observers generally call “derivatives.” The persons and institutions which purchased derivatives we by and large sophisticated enough to understand how crazy it was to buy them.

I do not anticipate that the investment in under-collateralized mortgages by the United States government will produce a profit. If that were likely the market would be purchasing these instruments from the weak banks and investment houses, thus freeing up capital. On the other hand, if the market is left to work, a price will be found at which the purchaser will be satisfied that they will make a profit, and the seller will returned working capital, although obviously at some cents on the dollar.

The so called “credit freeze: This is partly artificial since markets are waiting to see how good a deal they can get from a government handout. The credit freeze is also a matter of returning persons with poor credit to the status of having poor credit, instead of being able to secure mortgages with nothing down, or obtain credit cards when they do not have the income or proven discipline. So in part this is not a freeze. We must consider that a few credit suppliers will withhold credit simply to place pressure on the Congress.

You keep for a time, all the credit card pre-approved offers you receive in the mail. I am still receiving these on a regular basis, so I do not find a true credit freeze. Also look at recent major new loans taken out or re-negotiated, like that of McClatchy newspapers. A credit worthy person, or business is able to find lenders with capitol to lend.

I do not see taking loans to buy mortgage related assets as being an efficient use of capital. In the end we all pay with higher inflation form the government having taken massive loans. Will the lost value of houses return soon? In a decade? Will the vacant houses be filled? By whom?

As many have said, why are we letting the fine people who got us in this mess, solve it?

The House has told the news media that they will be passing this bill. I have my doubts, but, Lou Dobbs doesn't support this bailout either. He will be putting the Senate number to call to tell them NO BAILOUT on his Lou Dobbs.com site.

The market numbers were up, some are BSing that it's because of the talk of a new deal, but the numbers were up LAST NIGHT.

Donald Trump says that gas prices are going down fast and are suppose to drop very low if they leave the market alone>>>GUESS WHAT I'M SUPPORTING Ha. Part of the reason things have been bad with layoffs and prices up so high were a result of the gas prices and no drilling.

No tax payer;
This is Bush's plan.
Pelosi is trying to compromise and get something passed with a few safeguards.
Blame Prez. Blofeld Bush and Sec. Daddy Warbucks for this mess.
Reaganomics is dead; Long rot Reananomics!

"These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

There will never be real change in this country until the upper classes start feeling real pain.
Paulson's plan primarily benefits them, trickles down to all others.
This needs to be, er, to use an old bb term, put into a "stall".

Until Nov 4.
Then the pain threshhold will probably have been reached, and Barack elected and a lot more Reps. booted out.

* * * * *
Posted by: C. Morris | September 30, 2008 6:35 PM
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C. Morris, grumbled, and spake thus:
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"Gosh darn! Who knew Reagan was a socialist?"
*
Nobody knew, because he wasn't a socialist. Nor do I see how you draw the conclusion he was a socialist because of this plan. It isn't a socialist plan. When a plan calls for a central government to turns on and leave on the money spigot - like the defeated bailout plan did - then it's a socialist plan.
*
And then C. Morris spake thus:
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"I generally like this plan, and it should be Dem. plan. Screw the Repubs."
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The Dems may need the Repubs to get it passed. If you recall, most of those who voted for the defeated bailout are Democrats. Many of those Democrats may not like this alternate plan because they actually believe Secretary Warbucks. Pelosi seems to believe him. But I'll just betcha that most Republicans and a lot of the Democrats who voted against the bailout will like it just fine.
*
Besides, who cares who votes for it as long as it's good for America? That is, unless you are really into maintaining the current state of political polarization.
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And then C. Morris spake and saith:
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"If nothing else this latest debacle proves you can't trust a Republic politician."
*
I think that's the last thing it proves. I don't think anyone can reasonably conclude that anyone was deceitful about promising the votes. I think that Pelosi and Boehner simply spoke before they knew what they were talking about and promised more than they could deliver.
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And, in any event, you are not supposed to trust politicians. That's why we don't leave them in office for life. They have a tendency to cut corners right across your best interests. It is because of people in government that necessary government is still a necessary evil.

The DeFazio-Kaptur plan sounds better than the fox-guarding-the-hen-house plan by Paulson. The D-K plan charges for Wall Street transactions as was done during the depression and would generate 150 billion per year. This is a way to get Wall Street cronies to bail each other out, and not put the bailout bill on taxpayers credit card. Also, we need lots of finger pointing in order to recoup the losses for Americans.

Marcy Kaptur would make a better Speaker than Pelosi. Kaptur does not swoon for Chimpy as Pelosi does.

Question: If credit is so tight, how does Congress continue to vote for more "emergency" war funding or military funding? How can American taxpayers put 700,000,000,000 dollars on a credit card for Wall Street if there is no credit to be had?

In the mean time, while waiting for the new DeFazio-Kaptur Dem bailout plan, perhaps the Japanese banks can lend Americans money since the American banks are going to try to frighten us with the "no money to lend" tactic in order for them to get their hands on American taxpayers' $$$$$. The Japanese said on the news this AM that they were not part of the subprime mess. Said they were not invited to the party hence do not have a hangover. So lets ask the Japanese if they will lend to us while our banks figure out how big a farce they want to present.

In case you guys missed this? The following is off the Whitehouse.gov website (pass it on): -------"Expanding Homeownership. The President believes that homeownership is the cornerstone of America's vibrant communities and benefits individual families by building stability and long-term financial security. In June 2002, President Bush issued America's Homeownership Challenge to the real estate and mortgage finance industries to encourage them to join the effort to close the gap that exists between the homeownership rates of minorities and non-minorities. The President also announced the goal of increasing the number of minority homeowners by at least 5.5 million families before the end of the decade. Under his leadership, the overall U.S. homeownership rate in the second quarter of 2004 was at an all time high of 69.2 percent. Minority homeownership set a new record of 51 percent in the second quarter, up 0.2 percentage point from the first quarter and up 2.1 percentage points from a year ago. President Bush's initiative to dismantle the barriers to homeownership includes: American Dream Downpayment Initiative, which provides down payment assistance to approximately 40,000 low-income families; Affordable Housing. The President has proposed the Single-Family Affordable Housing Tax Credit, which would increase the supply of affordable homes; Helping Families Help Themselves. The President has proposed increasing support for the Self-Help Homeownership Opportunities Program; and Simplifying Homebuying and Increasing Education. The President and HUD want to empower homebuyers by simplifying the home buying process so consumers can better understand and benefit from cost savings. The President also wants to expand financial education efforts so that families can understand what they need to do to become homeowners."

Careful what you say about the Republicans....if it weren't for them (2/3 voted NO) the original bailout would have passed the Congress. Hopefully these 228 R&D's can stick to their guns and not be swayed by the pandering of the Senate.

I have been aligned with the Dem's for years and I will only say this, Nancy Pelosi and her crew have NO Balls! They finally get power and what do they do? Bow to King George!! I hope Cindy Sheehan knocks Pelosi off her throne.

At this point, it's not about political parties, but who's willing to buck the BS of Washington. Time to "fire" the current "board of directors' we call the Senate....they are nothing but sell-outs.

Nancy Pelosi and the Democrats could have passed the bailout bill without a single Republican vote. Dems totally controll the House.

1999, President Clinton set “standards” that forced Fannie Mae and Freddie Mac to make bad loans.
Republicans started ringing warning bells about Fannie Mae as early as 1999, but Dems swore there was no problem in sticking minorities with high interest loans because Fannie Mae was lining the Dems pocket.
At a 2004 Congressional hearing, Democrat after Democrat covered for Fannie Mae and Freddie Mac and railed against regulating Fannie and Freddie.Watch the following video and see Democrats fend off Republican calls for regulation

ACORN attracted Barack Obama in his youthful community organizing days. Madeline Talbott hired him to train her staff — the very people who would later descend on Chicago’s banks as CRA shakedown artists.

The possibility of a financial meltdown was foreseen in advance. Senator McCain co-sponsored legislation to impose bank-like regulation on Freddie Mae and Freddie Mac. That legislation, which could have prevented the current crisis, was killed by the Democrats.

The Democrats tried to reward ACORN by providing the organization a portion of whatever profits were to be made in the rejected big bailout. That giveaway to the community organizers was only removed after Senator McCain was able to get Republicans a seat at the negotiations for the big bailout.

Dems chickened out and then started blaming others for their fear of the monster, Fannie Mae, that they created. Pelosi is a blight on Congress.

Can we include CONSUMER DEBT in this discussion? There is no need for new credit if old debt cannot be paid off. It is time to help over a 100 million americans retire some of their own unsecured OLD debt by simply waiving interest charges on debt that is older than 4 years. This is debt in which the banks have already made back a 100% on their loan. Now let the consumer pay down their debts so they can afford new credit down the road.

We need a consumer bill of rights in this country to combat the excesses of our goverment and Wall Street. How much of the money that is being siphoned to Wall Street will actually be used to invest in America and American companies that actually employee people IN THIS COUNTRY?

I DON'T NEED AN ACT TO SUPPORT NO BAILOUT. I just dial up the House and Senate members and say LOUDLY SAY NOOOOOOO !

Posted by: tried and true Americand 7:28 PM

Let me guess, you're Rachael Madcow ha. I've taken a listen to some of the LIBERAL RADIO RANTINGS. It explains why none of you guys can keep alive on the radio long. It's a whole lot of child-like ranting about NOTHING ACCURATE! I'll be fair tho...maybe I haven't heard your station>WHAT WAS THAT AGAIN?

Now, Rush Limbaugh and Hannity etc....those guys will tell you things the MEDIA ARE CLUELESS TO or DELIBERATELY WITHHOLDING. It's a scoop you won't find ANYWHERE ELSE, and it's out ahead of anyone else that might think to tell you it ! ! ! Look at the number of listeners Limbaugh has.....it will blow your little mind.

Is that all you Wingnuts have got? Something Barney Frank said in 2003...in freaking 2003!

HAHAHA!!!

Posted by: McCain = Bush's third term | September 30, 2008 11:05 PM

No- but what else is needed..? And BTW, interesting criticism from someone who quoted Herbert Hoover. Maxine Waters, Chris Dodd and many othes could be quoted as well to make the point that when there were legit concerns voiced that these "leaders" from the left, chose to not only NOT take the concerns seriously, but to continue to support the GSEs... Frank,Dodd, Kerry, Obama and the Dem Black Caucus etc.. Criminally supported these failed banks in return for large contributions...

Maxine Waters, Chris Dodd and many othes could be quoted as well to make the point that when there were legit concerns voiced that these "leaders" from the left, chose to not only NOT take the concerns seriously, but to continue to support the GSEs... Frank,Dodd, Kerry, Obama and the Dem Black Caucus etc.. Criminally supported these failed banks in return for large contributions...

Posted by: heartburn | October 1, 2008 10:45 AM

.....except for the fact that REPUBLICANS owned both houses of congress, the supreme court and the White House from 2000 - Jan 07.

Kind of hard to make things happen when you're the minority party like the Dems were during the time period that Republicans McCain and Phil Gramm were deregulating Wall Street.

You can keep making excuses for the Republic Party all you want, you're a rightwing ideologe, that's what you do. But from now on you're going to do it as a member of the 4th party gadfly Republican party because that's what you and your party have become.

The exposure of FDIC is being more than doubled while the Federal Deposit Insurance Fund is virtually guaranteed to be depleted. The American people are being sold a bill of goods that far exceeds what is necessary, while what is necessary is not even accounted for by the $700 billion bailout package. We will rue this day.

The DeFazio proposal confuses me: the Net Worth Certificate Program seems like an artifice, a loan to banks that isn't called a loan, an absorption of risk by taxpayers without corresponding benefits.

Although I'm disgusted that Pelosi hasn't allowed/developed a real response to the Republican's give-away, the Democrat's mumbling about equity makes more sense then Certificates. The market seems to need taxpayer money, whether we call it an interest-free certificate, buy toxic debt, or purchase equity. We're exposed to risk in any case; buying equity means taxpayers might lose or gain.

Can anyone explain the DeFazio plan in more detail -- haven't found much on the web.

As a Wall Street CEO, this plan sucks! I am facing a 10% cut on my end of the year 60 million $ bonus check, we absolutely need the taxpayer to make up our shortfall. Please vote for the bailout, without it, I may not be able to landscape my Carribean island!

I "LOVE" THIS PLAN. Paulson, Bernanke, and Bush intended a coup or "power grab" of the entire U.S. Treasury for the Federal Reserve, which is NOT a federal agency. It's a private agency owned by 12 wealthy mostly European families (Rothschilds, Warburgs, Schiffs, Lehmans, Harrimans). The entire federal debt is owed to these 12 families.

Paulson should be FIRED. As Treasury Secretary he's "supposed" to represent the Ameircan people and protect our funds.

The FED'Ss next power grab will be what they call THE BLUEPRINT, which gives them total control over all banks, credit unions, insurance, and investments. With the government, military and social security recipients required to direct deposit their paychecks for at least 5 years, a cashless system is coming next. If the FED doesn't "like" you, no money.

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